With exploration and production already its primary income and growth engine, Amerada Hess Corp. (NYSE: AHC) made it even more dominant last week. The New York-based major oil plans to to buy London-based independent Lasmo Plc (NYSE: LSO) for approximately $3.5 billion in cash and equity. Amerada Hess also will assume $1.6 billion of Lasmo debt. It will finance the cash portion of the purchase from existing cash and a bank facility arranged by Goldman Sachs International, which will make the offer in the U.K. on behalf of Amerada Hess. AHC closed $2.44 lower, at $60.375, after the news. LSO climbed $1.25, to $7.50. E&P analysts' initial reactions were mixed. "It's a good deal that meets a number of Amerada Hess' objectives fairly quickly and at a reasonable cost," said Eugene L. Nowak of ABN Amro Securities in New York. "It's not a grand-slam home run," said Gene Gillespie of Howard Weil Labouisse Friedrichs Inc. in New Orleans. "The stock retreated somewhat over balance-sheet concerns. But it broadens Amerada Hess' portfolio and gives it production in areas it wasn't in before." There is a market perception that Lasmo has been rumored to be for sale for so long because its properties are subpar, he added. "I don't think that was the case. It simply needed to find someone who could make the properties fit into its own strategy." Mark Gilman of ING Barings Securities LLC in New York was more critical. "I think it's a little overpriced. I also don't think it accomplishes some of what Amerada Hess suggests. But it can accomplish other goals, particularly enhancing the value of the company's shares." Lasmo's interests in Iran and Libya represent a potential problem since U.S.-based Amerada Hess is prohibited from operating in these sanctioned countries. Chairman John Hess said the company will try to continue to exploit the Libyan and Iranian opportunities from its U.K. office. "We hope to satisfy any U.S. government requirements in that manner," he added. The situation may prompt a federal review. "It is Amerada Hess' view that if it has to divest such assets to complete this deal, it will do that," Gilman said. Gillespie is not certain this will be necessary. "My understanding is that the congressional sanctions against Libya and Iran will expire next August, and there's little support for renewing them." If Amerada Hess can put the properties into a blind trust, it may be drilling wells in Libya by year-end 2001, and later in Iran, he said. "At worst, it would have to divest the assets, but it's not a deal-breaker." The purchase will provide Amerada Hess additional reserves and production, and shifts its overall portfolio more toward E&P, Gilman said. He also considers it earnings-dilutive in a normal oil-price environment. Standard & Poor's Corp. raised its assessment of Amerada Hess' long-term debt and its ratings of the company's short-term corporate credit and commercial paper. Moody's Investors Service, meanwhile, affirmed its Baa1 rating of Amerada Hess' senior unsecured debt and revolving credit facility, and its Prime-2 assessment of the major's commercial paper, with a stable outlook. Amerada Hess is offering one common share and 98.29 British pounds in cash per 78.7 Lasmo common shares, or about 180 pence, an approximately 28% premium to Lasmo's Nov. 3 closing price. The purchase will move Amerada Hess closer to the E&P goals that it established five years ago, chairman Hess said. "Approximately 90% of our company's capital expenditures, before this transaction, go to E&P." In 1997, refining and marketing consumed 57% and E&P 43% of Amerada Hess capital employed. "With the acquisition, we estimate that E&P will be 76% and R&M will drop to 24% of our total capital employed in 2001-a major transformation," Hess said. Amerada Hess' E&P goals include diversifying its upstream holdings beyond the United States and the British North Sea, focusing on high-quality assets in a few countries and accelerating production life and growth. "We also want to become more international and grow that component of our reserves from 13% to 33%. The addition of Lasmo will raise that level to 41%, so we will meet that objective. International operations are significantly more economic than domestic exploration and production. This acquisition goes a long way in repositioning our company in that arena." Amerada Hess is paying $5.30 per BOE for Lasmo, compared with the $6.91 per BOE that John S. Herold Inc. recently reported as the average paid recently for oil and gas reserves. The purchase will push Amerada Hess debt-to-total-capitalization to 54%. The company plans to reduce that to 33% by year-end 2001. "We structured the transaction to be 69% cash and 31% stock to remain financially strong, so we can complete our capital and share-repurchase programs," Hess said. -Nick Snow